Jhonerl L.

Ybañez BSA - 4 ACCTG 121C (Synthesis) Thursday 7:30-8:30

KANSAYAKU
I. Facts of the Case
 Satoshi Hirata served on the audit staff of Asahi, one of Japan’s four largest public
accounting firms. Like its three principal rivals, Asahi was affiliated with one of the
Big Four international accounting firms, namely, KPMG. Through-out the spring of
2003, Hirata had been assigned to the audit of Resona, a large metropolitan bank.
The bank was being audited jointly by Asahi and Shin Nihon, the Japanese affiliate
of Ernst & Young. On April 24, 2003, after completing his work for the day on
the Resona engagement, Satoshi Hirata returned to his 12-story apartment
building in central Tokyo, went to the roof of that building, and leaped to his
death.
 Although Satoshi Hirata did not leave a note explaining his decision to take
his life, law enforcement authorities subsequently learned that the young auditor
was distressed by his job. At the time, Resona and Japan’s other major banks
were experiencing major financial problems. For well over a decade, Japan’s
handful of “megabanks” had routinely embellished their reported financial health
by, among other means, refusing to provide adequate reserves for their expected
loan losses. In the spring of 2003, Resona’ financial condition had deteriorated to
the point that its independent auditors doubted the bank could survive without a
large infusion of capital from another bank or the federal government.
 From the seventh century A.D. through World War II, the Okurasho or “great
storehouse ministry” was responsible for overseeing the economic development
and well-being of the Japanese nation. Often referred to by political insiders as
the “ministry of ministries,” the Okurasho was a tightly knit group of powerful
and wealthy individuals who advised the Japanese emperor on all major economic
decisions facing the country and who effectively controlled the nation’s banking
system. In the Japanese economy, the banking system has historically been very
powerful because the principal source of funds for private businesses has been
debt rather than equity capital. The Okurasho also played a major role in
overseeing Japan’s stock market when it became a significant factor in the
Japanese economy during the twentieth century.
 The large number of business failures during the 1990s produced huge losses
in the loan portfolios of the major metropolitan banks that were the principal
source of Japan’s investment capital. However, the extent of the loan losses was
not reported in the audited financial statements released periodically by those
banks. Pressure applied by MOF officials on the auditors of Japan’s large banks
resulted in those banks receiving clean audit opinions despite their massive
 financial problems. Eventually, both the MOF and the nation’s major accounting
firms would be held responsible for the huge government bailouts that were
necessary to rescue Resona and other large Japanese banks.
 A small number of large accounting firms have dominated Japan’s accounting
profession and independent audit function since World War II. In turn, the MOF
effectively controlled those large accounting firms over most of that time
frame, wielding power over them similar to the power that it wielded over the
nation’s major banks. In 1998, the founder of one of Japan’s major accounting
firms told a U.S. journalist that the large government agency “really controls
the accounting profession in Japan.”6 So complete was the MOF’s control of
the accounting profession that it reportedly handpicked the individuals who
were to serve in key executive positions at the country’s largest accounting fi
rms. In the late 1990s, the chief executives of four of Japan’s six largest
accounting firms had previously worked in some capacity with the MOF.
The close ties between the MOF and the major accounting firms meant that the
top executives of those firms routinely kowtowed to the wishes and demands of
MOF officials.
 In the United States, the business press, financial analysts, and regulatory
authorities maintain that an absence of auditor independence was a key factor
that contributed to the series of high-profile audit failures of such companies
as Enron, WorldCom, and Adelphia Communications, among others. Allegedly,
the long tenure of auditors with their clients, personal relationships between
individual auditors and client personnel, and the large consulting fees that
clients paid their auditors for non-audit services made it difficult for audit firms
to objectively report on major clients’ financial statements. However, parties
familiar with auditing practices and norms around the world insist that Japanese
auditors have historically had much closer ties to their clients than auditors
in any other country, including the United States.
 KANEBO, LTD.: JAPAN’S ENRON - The Tokyo Cotton Trading Company was
founded in 1887 on the banks of the Sumida River that flows through Tokyo. Over
the following decades, the company became a large and prosperous textile and
apparel manufacturer—only to have its operating facilities totally destroyed during
World War II. With the help of significant bank loans, the company, renamed
Kanebo, Ltd., resumed operations on a much smaller scale in the late 1940s. By
the late 1990s, the company ranked among Japan’s largest public corporations.
Kanebo’s principal operations included the manufacture and sale of a long line of
cosmetics, apparel, textiles, pharmaceuticals, toiletries, and food products.
 Throughout the time frame that the fraud was being perpetrated, Kanebo’s audited
financial statements indicated that the company was in reasonably good financial
condition. However, a criminal investigation revealed that the company was
hopelessly insolvent from 1995 through 2004. According to a representative of
 Tokyo’s Public Prosecutor’s Office, Hoashi, former company’s president, ordered
Kanebo’s accounting staff to falsify the company’s accounting records. Hoashi
reportedly told the accountants that if they did not cooperate, the company would
fail and its employees would lose their jobs. Hoashi’s two subordinates (who were
also indicted) gave the company’s accountants specific instructions on how to
distort Kanebo’s reported financial data. The accountants were told to record
fictitious sales and to understate various expenses to improve Kanebo’s operating
results and to make the company appear solvent.
 ChuoAoyama, the second-largest CPA firm in Japan, served for decades as the
audit firm of Kanebo Ltd. Tokyo’s Public Prosecutor’s Office filed fraud charges
against three ChuoAoyama auditors who had been assigned to the Kanebo audit
engagements. According to the prosecutors, the three ChuoAoyama auditors had
not only been aware of Kanebo’s true financial condition but had also
recommended additional methods for concealing the company’s poor financial
health. In August 2006, the three ChuoAoyama auditors were convicted of the
charges fi led against them. Before sentencing the three individuals, the presiding
judge noted that they had “damaged the social trust of certified public
accountants” and that their “crimes deserve to be severely criticized.”15 The judge
also observed, “It is shameful that they have failed to realize the high
professional morality as certified accountants and lost the true aim of auditing,
which is to protect investors.”

SWOT Analysis (to the viewpoint of the auditors – “kansayaku”)

 Strength
 CPA’s in Japan had onerous requirements for becoming CPA. CPA
candidates in Japan were required to pass rigorous examinations and
serve a three-year internship with an accounting firm before they could
become a CPA.

 Weakness
 In the case of Satoshi Hirata, the young auditor was distressed by his job.
 In the case of Okurasho, pressure applied by the Ministry of Finance officials
to the auditors of Japan’s large banks resulted in those banks receiving
clean audit opinions despite their massive financial problems.
 In the case of Kanebo, Ltd., accountants were pressured by the top
executives to falsify the company’s accounting records, and if they will not
cooperate, the company will fail and its employees would lose their job.
  Still in the case if Kanebo, Ltd., the independent auditors are the
coconspirators of the fraudulent scheme of the top executives. It is due to
their long tenures with their clients.
 Japanese auditors subordinating their judgement to the wishes or demands
of their clients.

 Opportunities
 The cordial relationship between Japanese auditors and their clients is at
least partially a cultural phenomenon because the Japanese business
community “emphasizes relationships and harmonious working practices.”

 Threats
 Japanese auditors subordinating their judgement to the wishes or demands
of their clients.
 Absence of auditor independence was a key factor that contributed to the
series of high profile audit failures.
 The smaller audit fees charged by Japanese accounting firms impose
restraints on the scope of independent audits and result in audit services
being considerably less profitable for Japanese accounting firms.
III. Recommendations
 Working in the public practice give a lot of stress to the CPA’s. It occurs when an
individual feels too much pressure that they are not unable to cope with like in the
case of Satochi Hirata. As an accountant we should know how to deal with different
pressures that we may encounter within or outside of the company. We should
handle our stress to avoid compromising our physical, mental and emotional
health. We are one of the builders of prosperous country, so we should take of
ourselves to maintain our productivity.

 In the case of Okurasho and Kanebo, Ltd., the auditors should be independent
from the influence of the government authority and client company, so that the
audit opinion will not be influenced by the relationship between them. The auditors
are expected to give an unbiased and honest professional opinion on the financial
statements to the shareholders. Independence is the main means by which an
auditor demonstrates that he can perform his task in an objective manner. As an
auditors in the near future, we must put in our mindset that public confidence in
financial markets and the conduct of public interest entities relies partly on the
credibility of the opinions and reports given by us in relation with financial audits.

 In the case of Kanebo, Ltd., when there is such a dominant person at the top,
especially one that has great control over subordinates, the reliability of the
financial information decreases. The commanding figure decreases the checks and
balances within the company that ensure correct information, which increases
 opportunities for fraud. Auditors need to recognize this figure and plan accordingly
to inquire about company information from both internal and external independent
sources, keeping in mind that the dominant person could also compromise internal
inquiries. The auditors must recognize the authoritative force and try to examine
the aspects that he had definite control over deeper. The auditor should seek out
the motivations that the dominant player may have and examine areas that he
would want to have altered.
 In the case of Kanebo Ltd., the auditors failed to realize high professional morality
as certified accountants and lost the true aim of auditing, which is to protect
investors. As an auditor someday, our legitimacy to act on behalf of the public has
its foundation on moral grounds and our logic of existence is confirmed by our
accountability to all stakeholders interested in the audit report. This is the reason
why we are perceived as guardians of the public interest. In this position, we
should protect the auditor’s fiduciary responsibility marks our legitimacy on the
market with the aim to enhance the quality of the financial report, portraying in a
complete and honest way the company’s accounts. This is also the reason why as
an auditors, while performing our work, must avoid the pursuit of our personal
interests. Thus, in the conflict of interest, which would affect professional
judgement and compromise our ethics, needs to be neutralized so that we will
gain trustworthiness act as an agent of trust.